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HMRC internal manual

VAT Small and Medium Enterprises Assurance Manual

Supplementary or alternative checks: partial exemption

Where appropriate, the following checks should be carried out:

  • check that the trader is correctly applying either the standard method or a special method approved by the department. Check that the method produces a fair and reasonable attribution of input tax to taxable supplies;
  • check whether the trader has acquired capital goods for which the input tax should be included in partial exemption calculations (Capital Goods Scheme) over a number of years; and
  • complete EF, recording action taken in respect of audit work carried out.

Ensure that VAT 12 action is taken to update central records. The Partial Exemption indicator has three values:

  • 0 Fully taxable;
  • 1 Exempt income with potential input tax restriction; and
  • 2 Exempt income with input tax restriction.

Indicators 0 and 1 can be set/confirmed by a telephone call, but indicator 2 can only be set after audit activity has confirmed the position.

(Detailed guidance on partial exemption can be found in PE - Partial Exemption).